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The dollar rebounded against the euro and the yen on Wednesday after South Korea said that long-term plans to diversify its foreign exchange reserves did not mean it would sell the U.S. currency.

The dollar's recovery gained momentum after a Japanese Finance Ministry official told Reuters that Japan had no plans to diversify its foreign exchange reserves -- the largest in the world at almost $850 billion by buying euros.

On Tuesday the dollar suffered its biggest one-day fall against major currencies since December as the market seized on reports South Korea's central bank planned to spread its $200 billion of reserves, the world's fourth largest, among a wider array of currencies.

The currency volatility prompted the Bank of Korea to clarify on Wednesday that its reserve diversification plans were not new and did not mean the central bank would soon sell dollars for other currencies.

Worries the world's central banks, especially in Asia, are shifting their reserves away from the dollar and making it more difficult for the United States to fund its massive current account gap have helped fuel the dollar's three-year decline.

Dealers said the dollar's bounce back against the yen was also sparked by data showing a big slowdown in Japanese exports in January, suggesting Japan's economy was struggling to recover after falling into recession for much of 2004.

At 06h20 GMT, the dollar bought around 104.65 yen, up around 0.6 percent on the day and recovering from a 1.5 percent slide on Tuesday.

The euro edged down to around $1.3240, slightly below its level in late New York trade and down from a session high around 1.3270.

But the euro was up about half a percent against the Japanese currency at 138.60 yen after hitting a seven-week high around 138.80 yen.

The yen's fall was initially triggered by data that showed Japan's trade surplus in January fell 59.9 percent from the same month a year earlier to 200.8 billion yen, much worse than forecasts. Exports were up a tepid 3.2 percent from a year earlier.

The Japanese currency extended its slide after Masatsugu Asakawa, director of the forex market division at the Finance Ministry, told Reuters the country had no intention of changing the makeup of its reserves.

The rise of the European currency against the yen was also likely given a hand by Japanese investors buying euros to fund purchases of 50-year French bonds, said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo.

France is expected on Wednesday to sell more than 5 billion euros of what would be the world's longest dated government bond.

Following South Korea's original remarks on Monday, the dollar tumbled to multi-week lows against most major currencies, seven-year lows versus the Korean won and 22-year lows against the New Zealand dollar.

The U.S. dollar index, which measures its strength against a basket of major currencies including the euro and the yen, fell 1.4 percent on Tuesday in its biggest tumble since late December.

Later on Wednesday, markets will focus on U.S. consumer prices in January, as well as the release of minutes from the Federal Reserve's policy meeting on Feb. 1-2.

JPMorgan Chase strategists said in a research note that the dollar may gain if the Feb. 1-2 minutes reinforce or strengthen the view expressed in minutes of the previous Fed meeting that risks are tilting in the direction of rising inflation.

A hefty pick-up in inflation could prod the Fed to accelerate its campaign of "measured" monetary tightening, enticing investors to short-dated dollar deposits.

The Fed has raised its funds rate six times since June last year, bringing it to 2.5 percent.

EURO/DOLLAR: Moving up towards the 61 percent retracement area and the mid-January high around $1.3300. The euro is overbought and although momentum has turned bullish further strong gains today may be difficult to achieve. Therefore today we favor consolidation below $1.3300, with dips probably limited to the $1.3150 area. Later this month we shall allow for another squeeze up towards $1.3450 where prices will probably find another interim top and consolidate below here for much of March.

STERLING/DOLLAR: Nudging cautiously towards the 61 percent retracement area at $1.9160, a process that is likely to continue for several days and should take us up to better resistance around $1.9350/1.9400. Cable is still not overbought, momentum has turned bullish, and lots of long positions need to be re-built. For today allow for consolidation around $1.9050, with dips to $1.9000/1.8950 seen as buying opportunities for a subsequent move higher. Note that at the moment we do not feel that Cable (and many other major currencies) will manage a move to new highs for the year, so there should be opportunities to sell U.S. dollars several times over during the few weeks.

DOLLAR/YEN: With the yen roughly holding Ichimoku `cloud' support the U.S. dollar has tried to regain its footing. Although the U.S. unit is not oversold against the yen, we expect it to try and consolidate above 104.00 yen again today. Rallies to 105.00/105.55 yen are seen as selling opportunities for an eventual break lower and a move to re-test the lower end of the broad band established since November.

@13h30 GMT: U.S. January CPI

@19h00 GMT: U.S. Fed Minutes ofFOMC

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